Each Australian state and territory enacted security of payment legislation to ensure contractors and subcontractors are paid on time and to try to reduce the need for court proceedings to recover money owed. In New South Wales, the security of payment legislation consists of the Contractors Debts Act 1997 and the Building And Construction Industry Security of Payment Act 1999 (NSW) (the Act). The Act creates a statutory right for the claimant to make progress payment claims and receive payment, even where the contract has no provision for progress payments. Below, we set out the process involved as well as answer some FAQs about how the Act operates.
1. When Does The Act Apply?
The Act is based upon the carrying out of ‘construction work’. The contractor or subcontractor must have carried out or performed the construction work under a ‘construction contract’ to come within the ambit of the Act. Construction contract is defined broadly to include any contract or arrangement for carrying out construction work.
Once the Act applies, a person who has completed construction work under a construction contract has a right to progress payments. Any progress payment becomes due and payable on the date stated under the terms of the contract, or if no express provision is made, on the date being ten (10) business days after a payment claim is made.
2. How Do I Make a Payment Claim?
The procedure for recovering progress payments by a claimant who has performed construction work under a construction contract is relatively undemanding.
A claimant makes a payment claim by serving a statement of claim on the entity who is liable to make the payment under the contract. The payment claim must:
- Identify the construction work that has been carried out; and
- Quantify the progress payment amount that is being claimed.
If you are the head contractor in the ‘construction chain’ (i.e. not the principal or the subcontractor), a supporting statement must accompany the payment claim per the regulations. This supporting statement needs the head contractor to state that subcontractors have all been paid to date.
Under amendments to the Act in 2014, it is no longer a requirement for claimants to endorse the Act on their payment claim expressly. The Act removed any requirement for the payment claim to state it is made under the Act. The reasoning behind this was to deter respondents from undertaking early assessment and engaging lawyers at the moment a payment claim was served to determine whether it was made under the Act. Instead, it is designed to increase the number of payment schedules done to ensure the progress payments move through faster.
3. What Happens If You Receive a Payment Claim?
If you receive a payment claim, and you do not provide a payment schedule within either the time provided in your construction contract or ten business days after the claim is served (whichever is earlier), you will be liable for the entire amount claimed.
A payment schedule must include the following:
- The payment claim;
- The amount (if any) that the respondent is proposing to pay (the scheduled amount); and
- Reasons why the respondent is not paying the amount in full (if they don’t intend to pay).
As discussed above, where the respondent doesn’t provide a payment schedule within the stated time, the claimant can either:
- Proceed to recover the unpaid amount as a debt due and owing to the claimant;
- Make an adjudication application about the payment claim; or
- Serve notice on the respondent of its intention to suspend construction works under the contract.
Evidently, the consequences for not responding promptly to a claim are quite severe. If you fail to respond you become liable for the full amount, set out in the payment claim. If you provide a payment schedule setting out a lesser amount, then this amount must be paid to the claimant.
The Act also prescribes when progress payments should be made. This will depend on whether it is between principal and head contractor, or subcontractor. The period is no more than 30 days.
4. What is an Adjudication Application?
As set out above, an option for the claimant is to make an adjudication application. Adjudication is an expedited determination based on unsworn submissions as opposed to sworn testimony. Adjudication is where an appointed arbiter reviews the evidence and documentation each party has put forward and comes to a binding decision. The process is designed to be straightforward and prescriptive. As such, neither party is required to attend in person, and the process is relatively quick and low-cost.
5. How is Adjudication Commenced?
A claimant can commence adjudication either:
- Ten business days after the respondent’s payment schedule is received (assuming the scheduled amount is less than the amount you are claiming); or
- 20 business days after the payment was due (again, assuming the respondent has not paid to you any or all of the scheduled amount).
Also, if you did not receive any payment schedule you are entitled to make an application for adjudication provided you follow the directions under the Act. You must complete the adjudication application to a ‘nominated authority’ under the Act, who will then nominate an adjudicator to determine the matter. There is an application fee payable for the adjudication.
6. What Form Must Your Adjudication Application Take?
The application must be in writing and must identify the payment claim and payment schedule that the adjudication is based on. Although submissions are not typically required, it is prudent to provide more detail to enable the adjudicator to adequately consider your position. The adjudication application needs to be served on the respondent so they have an opportunity to respond.
7. Are You Allowed To Respond To An Adjudication Application?
If you are validly served a payment schedule under the Act, then you can serve a response provided you satisfy the following criteria:
- Your application is in writing;
- You confirm which adjudication application you are responding to; and
- You don’t raise any further ‘defences’ or reasons why you are withholding payment. That is, you cannot change your ‘position’ between the payment schedule stage and the adjudication response stage.
You have as little as two business days after receiving notice of the adjudicator’s appointment or five business days after being served with a copy of the application to prepare your response.
8. What Does The Adjudicator Do?
The adjudicator is appointed quickly after the adjudication application is made. He or she will then notify the parties they have accepted the application (usually after they have done a conflict check).
The adjudicator is limited in what they can determine. An adjudication determination will include the following:
- The progress payment amount to be paid;
- Any interest that is payable; and
- When the payment is due to be paid.
Given the purpose of the Act is to facilitate quick determination of progress payments, the adjudicator’s determination is due within ten business days.
The Act hamstrings the adjudicator in what he or she can consider. Importantly, adjudication is not a replacement for full court proceedings. The adjudicator’s decision is supposedly final and once the adjudicator decides the amount to be paid, this is due within five business days unless otherwise specified.
If you don’t pay the determined amount then it is open for the claimant to file the adjudication certificate with the court. This has the effect of forming a judgment debt with the court thereby bypassing the ‘usual’ court process. In addition, the claimant can elect to suspect work on site.
9. Is The Decision Final?
Although the Act is designed so the adjudicator’s determination is final, you can try to have the decision set aside and should first speak with a lawyer to help assess your prospects for success. A court may set aside an adjudication determination in the following circumstances:
- Were you denied natural justice or procedural fairness?
- Was there no ‘construction contract’?
- Were there issues with service of the payment claim or adjudication application?
- Was there a jurisdictional error?
The determination cannot be challenged in court if the process has been carried out per the Act. If dissatisfied with the determination, a respondent is obliged to commence separate proceedings for repayment of any potential overpayment.
Despite its intentions, the Act has continued to provide the court with a steady flow of litigated matters between parties. In NSW (where the legislation has been in effect for the longest period), the courts are now hearing more nuanced arguments regarding the Act.
The Act clearly establishes what steps parties must undertake to push progress payments through. The intention is that the parties can continue working relationships while resolving progress payments. Parties should bear in mind the strict timeframes as there is no opportunity to revisit this.
If you need to draft a response to a payment claim, or if you need to draft a payment claim yourself, get in touch with our disputes lawyers on 1300 544 755.